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India Reports: Auto industry launches austerity driveThe automobile companies have refused to cut down prices and auto component manufacturers are finding it difficult to renew contracts at re negotiated prices. At the same time, the government has increased restrictions on import of critical components. The government is considering cut in excise and custom duties and soft loans to small and medium auto component manufacturers. Gujarat is hard selling the Delhi Mumbai Industrial corridor to car manufacturers. The wedding season has seen emergence of an interesting trend in the used car market. -Chillibreeze Business Research Team
Trends Car Two Wheelers Policy Others TrendsAuto cos go beyond layoffs & shutdowns in austerity drive First it was discounts and freebies. Then came production cuts. But sensing that these may not be enough to push sales and keep them in profit zone, auto makers and ancillary units have now launched an all-out war on costs, be it perks, travel or fun. While some of the leading players have limited air travel to senior executives (and that too in economy class), for some others it means lower daily allowance. Almost everyone has put a freeze on fresh recruitment and foreign training. All this is in addition to regular cost-cutting measures like reduction in entertainment allowance, stationery expenses and, of course, layoffs. India’s largest automobile company Tata Motors has already laid off more than 4,000 temporary workers. Force Motors, which makes a range of vehicles from three-wheelers to heavy commercial vehicles, has introduced five-day week, while bearing major SKF has transferred around 20 employees to other sections. Most auto majors have resorted to block closures at their plants in Pune, Ahmednagar and Nashik. The austerity drive follows the recent production cuts in the wake of falling demand. Since there seems to be no sign of revival in sales in the near future, auto companies are being forced to extend the cut to executive perks as well, industry sources said. There’s more bad news for top-level executives. Senior managers at auto majors like Renault face the prospect of a lower bonus this year, as their payouts are linked to the profitability of their global parents. Carlos Ghosn, CEO of Renault and Nissan, had recently said: “2009 is the year of survival and companies must have cash in hand.” The only good news is that auto companies have not yet started axing permanent staff and instead have clamped down on internal expenses, the sources said. Apart from Tata Motors and Renault, the list of the companies that have initiated big cost savings through such austerity measures includes Mahindra & Mahindra, Bharat Forge, Force Motors, SKF, Kirloskar Oil Engines, Tata Yazaki, Kirloskar Brothers and Thyssen Krupp.The worst affected are the heavy and medium commercial vehicle (M&HCV) makers and two-wheeler majors. While M&HCV production in April-October 2008 is down 7% at 1.44 lakh units, sales have taken a bigger hit of 10% at 1.27 lakh units. This month, companies like Maruti Suzuki, Mahindra & Mahindra and Tata Motors have started adjusting production to demand, while some others like Honda and Renault are scaling down fresh investments, said the sources. The problem is not only of falling domestic demand, but exports as well. According to industry officials, with the global auto market going through a downturn, companies have started cutting down orders or postponing delivery schedules. Auto ancillary units with large exposure to commercial vehicle and two-wheeler companies have scaled down production by 15-20% since last month, but the worse may be yet to come. In October, car sales took a hit due to the subdued customer sentiment. While the July-September quarter saw a drop in sales of two-wheelers, cars and trucks, auto majors expect the October-December quarter to be worse. Currently, dealers are holding on to more than two months inventory as against the normal 10-15 days. Making things more difficult, finance companies have also started going slow on auto loans. Sources at auto finance companies said most of them have pruned lending to 25-30% of their usual monthly quota. Even bank lending is down by at least 30%, they added. No price cut now: Auto-makers The response of at least two out of the five sectors to which Finance Minister P Chidambaram today appealed to cut product prices in order to revive demand has not been encouraging at all. While the automobile industry outrightly said no to Chidambaram’s plea, the aviation sector largely remained non-committal. Automotive manufacturers clarified that high input and operational costs, a sluggish last quarter and an equally disappointing festive season had dented their operating profit. So, any reduction in vehicle prices was not possible at the moment. Companies such as Mahindra & Mahindra, Bajaj Auto, Hero Honda and Hyundai Motors ruled out any price cut for now, citing the above reasons. Car and two-wheeler manufacturing companies are of the opinion that depleting finance availability and reluctance of banks to reduce lending rates have dented sales more than marginal hikes in vehicle prices during the year. Similarly, two biggest motorcycle manufacturers in the country – Hero Honda and Bajaj Auto – have also ruled out any price cuts. The two-wheeler industry continues to reel from high interest rates and an overall credit squeeze in the market. The withdrawal of financing from key markets by many lending institutions has aggravated the situation. While prices of a few commodities have softened recently, their impact is still to be felt. The government needs to address these issues on priority. Measures such as lowering interest rates and making retail finance available would fuel growth rather than a short-term measure like price cut. Reduction of prices in this situation does not seem to be a viable option.” Chidambaram had reduced excise duty on cars and two-wheelers from 16 per cent to 12 per cent during the last budget, following which all auto-makers had agreed to pass on the benefit to the customer. However, instead of keeping their word, they hiked vehicle prices twice this year. Unlike the auto-makers, most of the airlines have been non-committal about a reduction in air fare following the FM’s appeal. Probably, Kingfisher is the only airline that said a price reduction was not possible at this point in time. Air India refused to comment on the issue and SpiceJet said that they were still reviewing the situation. Liquidity crunch boosts used car market With wedding season in full swing, a new type of car market has cropped up out of nowhere. And it is far different from the traditional used-car market that we know of. The gift-car market, as it is locally being called, is a reasonably new phenomenon in the north. The cars that are available in this market typically range between Rs 10 lakh and Rs 20 lakh and are driven for just 100-200 km before they are sold. Nine times out of ten, the transaction that takes place is usually an all-cash deal. And the cars are sold at a discount of Rs 2 to Rs 3 lakh. In fact, the ongoing liquidity crunch and high interest rates have spelled good times for the gift-car market here. As auto financiers in the country are shying away from lending, customers are opting for used cars i.e. making a second-hand purchase. They are getting a bigger and in most cases a better car at a price that manufacturers can only dream of offering. Cars such as Skoda Octavia, Mitsubishi Cedia and Honda Civic are in abundant supply. A recent entrant into the market is the Volkswagen Jetta. Popular SUVs such as Honda CR-V, Ford Endeavour, Mitsubishi Pajero and now GM’s Captiva are also being disposed of at jaw-dropping prices. Over a million (1.13 million) second-hand cars are bought and sold in India every year. The organised market here, however, accounts for just about 10% of it, unorganised dealers account for another 30% while the bulk (around 60%) is through personal, customer-to-customer deals. CarsChinese automaker to build cars, buses here Chinese auto major First Automobile Works (FAW) Group, which has evinced an interest to set up a manufacturing base in West Bengal, is now scouting for land in Maharashtra and Tamil Nadu. FAW Group plans to manufacture passenger cars priced at Rs 1.6 lakh and 80-seater buses in India, said JK Saraf, chairman of Ural India, which has entered into a pact with FAW Group for setting up an automobile plant in the country. For the proposed manufacturing unit in the country, “an investment of Rs 1,500-2,000 crore will be required. Ural India is a joint venture between Uralaz of Russia, Kolkata-based Motijug Group and the West Bengal Industrial Development Corporation. The company makes heavy-duty and high-capacity trucks, dump trucks and tippers at its manufacturing facility at Haldia in West Bengal. However, West Bengal government sources said the Chinese company might ask for some incentives from the state for setting up its unit. Now, Honda and Mitsubishi follow Nano to Gujarat Nano is paving the way for global car-makers to drive into Gujarat. After Tata Motors decided to relocate its small car project here,Japanese auto giants Honda and Mitsubishi want to park themselves in the state. Officials from both Honda and Mitsubishi met representatives of Gujarat’s delegation that visited Japan. The state government has been hard selling the Delhi-Mumbai Industrial Corridor (DMIC) to the auto majors. Around 40 per cent of the corridor, which is being built in association with government of Japan, falls in Gujarat. Ford to build small car in India Twelve years after it set up shop in Chennai, Ford India has announced plans to manufacture and market a small car for the Indian as well as the export markets. The company will be expanding its Chennai plant with the investment plans already announced by the MNC. Consequently, the company plans to increase its workforce by 1,500, though there will be no recruitments immediately. "We also estimate that about 7,500 jobs will be created indirectly through suppliers and dealers," said Ford India vice president (sales) Timothy D Tucker. "We are shifting our focus to India and China, which offer huge markets,” he added. Maruti cuts production on cooling demand Maruti Suzuki India has cut production to adjust to a slowdown. This follows expectation of lower sales growth of 4-5% for 2008-09 against the previous projection of 10% growth. According to the industry body Society of Indian Automobile Manufacturers (SIAM), Maruti produced 59,801 units in October, down from 59,983 in the same month last year. Sales declined 6.42% to 52,153 in October compared to 55,731 in the same month last year. For the April-October period, sales grew by just 2.47% to 4.1 lakh while production grew 2.55% to 4.41 lakh. The automaker has projected lower sales in November compared to October. But the company declined to quantify the drop in the number of cars that it will produce as a result of the readjustment. Toyota Prius India launch on hold Japanese auto major Toyota has put the India launch of Prius, the world’s first mass-produced hybrid vehicle , on the back burner. Infrastructure issues, a steep duty structure and inability to launch at a competitive price are some of the reasons cited by company officials. The recent move by Honda, Toyota’s arch rival, to slash the price of its Civic hybrid by Rs 8.14 lakh could also have interfered with Toyota’s plans to launch Prius in India, sources said. Toyota was looking to launch the car in 2009 at Rs 20-22 lakh. Honda’s Civic hybrid currently costs Rs 13.36 lakh. Toyota and Honda are the leading manufacturers of hybrid vehicles globally, and Toyota Prius (launched 11 years ago) is the market leader. The hybrid cars, which use both petrol engine and electric motor, are fuel-efficient and have lower emission levels, making them environment-friendly. Toyota’s domestic arm, which does not have the required manufacturing infrastructure to roll out hybrid cars, is unsure of the initial volumes and feels that the Indian market is not yet ready for such cars. Toyota Kirloskar, a joint venture between the Japanese company and Kirloskar Motors, was planning to import Prius as a CBU (completely-built-up units), as low volumes would make local manufacturing of the model unviable. Two WheelersPrice cut unlikely to increase demand: Hero Honda Country's largest two-wheeler maker Hero Honda virtually ruled out cutting prices, saying it was unlikely that such a step would spur demand. Globally, commodity prices have gone down but it has not been reflected in the input cost and most of the auto makers have long-term contracts to procure component from suppliers. PolicySops for auto sector on anvil The government is considering an array of sops, including a cut in excise duty and lower Customs duty on hybrid vehicles and components, for the troubled domestic automobile sector, which had recorded negative sales growth last month. These initiatives will be discussed at the Development Council for Automobile and Allied Industries (DCAAI), which is slated to meet early next month. Other steps, including soft loans for small and medium scale auto component manufacturers will also be considered. A DCAAI official said the main agenda of the meeting is to ascertain the current financial scenario and its impact on the industry. “There have been demands that sops like low interest rates and extended loan period should be offered in the relief package. This, however, will depend on the consensus between the different ministries and other members,” said the official . An official in the ministry of heavy industries, however, said it was too early to discuss a relief package. “There are various issues which are to be discussed in the DCCAI meeting like the strategies set under the Automotive Mission Plan (AMP). Already, this year we had cut excise duty and brought this from 16% to 14%. But there is a possibility that some relief measures may be announced after the election in the five states,” the official said. These initiatives are being discussed in the wake of negative sales in several automobile segments in October. Commercial vehicle sales were down by 35% to 28,027 vehicles while passenger cars sales dipped 9% to 1.26 lakh vehicles. Similarly, the two-wheeler segment declined 14% to 6.78 lakh units and three wheeler sales dropped 7% to 33,034 vehicles in the same period. The component industry, too, has been hit hard. While sales in the domestic market plummeted by around 15%, exports, too, declined by a much larger 40% in the past few months. Fearing harder times, various automobile bodies have requested government for a bailout package. Already, some of the industry bodies, like ACMA, have pressed for an immediate redressal package comprising of a two-three year ‘bridge policy’ to enable the industry survive the current economic crisis. It has further demanded that the government should take a pause in making any further cuts in import duties and consider revising the customs duties on auto-components as a temporary measure. OthersAuto industry cries foul over import restriction on components The Indian automobile industry, which has been undergoing a downhill drive, today decried the government's recent decision to impose restrictions on import of critical components saying it was akin to returning to the 'licence-raj' period. "Policies like this clog growth of the industry. It is like returning to the days of licence-raj," General Motors India Vice President (Corporate Affairs) told media. Last week, the government had slapped import restrictions on key steel items and critical automobile components. It had put automobile transmission shafts alongwith hot-rolled coils and other articles of iron, including engineering items, under the 'restricted' list. Commenting on the development, Society of Indian Automobile Manufacturers Director General Dilip Chenoy said the automobile industry was not consulted on the matter. "We are completely taken by surprise. We don't know the exact reason behind such a move... We are not sure if there has been a surge in import of such critical auto components," he said. Chenoy said the decision could backfire as it could lead to a price increase of end-products as companies will now face longer time period to get such components while there could be pile up of other inventories. "While we are yet to asses its impact, we are still uncertain about the consignments, which are already underway," he added. Also while companies need to take license to import such critical components, if they want to develop a local vendor, it is going to take time and it will end up increasing the manufacturing cost, Chenoy said. Anand Automotive to invest Rs 6 bn, set up 13 plants Despite the slowdown in the automobile sector, automotive components and systems manufacturer Anand Automotive Systems plans to invest Rs 6 billion (Rs 600 crore) to set up 13 plants across India by 2010. It is confident that its order book will help it tide over the current crisis. The Anand Group, which started operations with the establishment of Gabriel India, the group's flagship company, comprises 18 companies with 44 manufacturing locations currently. Exports accounted for almost 20 per cent of revenues, adding that the group now planned to increase this by tapping new markets. Southeast Asia and South America are emerging markets, and these are our next targets. The company decided to go ahead with the expansion plans despite the slowdown as it had adequate internal resources. The automotive industry is one of the largest and fastest growing in India's manufacturing sector. However, according to a report by the Automotive Component Manufacturers Association (ACMA), companies are currently facing the challenge of renewing their long-term export contracts at re-negotiated prices. |
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